Biochar-based fertilizers increase soil fertility, nutrient uptake, and crop yield. However, the response of peanut (Arachis hypogaea L.) growth to biochar-based fertilizer under water stress and the associated mechanisms are not well-understood. In this study, a two-year pot experiment using a split-plot design was performed to investigate the effect of biochar-based fertilizer (BF0, 0 t ha–1; BF0.75, 0.75 t ha–1; BF1.5, 1.5 t ha–1) on morpho-physiological traits, total N and K uptake, water use, and yield in peanut and soil N and K availability under water treatments (WW, well-watered; MS, moderate water stress; SS, severe water stress). In the WW and MS treatments, application of biochar-based fertilizer increased main stem height, leaf area, chlorophyll content, photosynthetic rate, total N and K uptake, water use efficiency, and yield in peanut, and soil N and K availability, relative to BF0. The combination of moderate water stress and 0.75 t ha–1 biochar-based fertilizer (IMSBF0.75 treatment) had 28.3% (2016) and 22.8% (2017) higher peanut yield than the conventional practice (IWWBF0 treatment). BF1.5 and BF0.75 produced similar peanut yields in all water treatments. The enhanced peanut yield with biochar-based fertilizer could be attributed to increases in main stem height, leaf area, chlorophyll content, photosynthetic rate, and total N and K uptake. Severe water stress decreased morpho-physiological traits, total N and K uptake, and yield in peanut, while moderate water stress maintained these traits, compared to the well-watered treatment. Thus, peanuts can sustain growth under moderate water stress. Biochar-based fertilizer alleviated the adverse effect of water stress on growth, nutrient uptake, and yield in peanut. In conclusion, a biochar-based fertilizer rate of 0.75 t ha–1 under moderate water stress (60–65% field capacity) improves growth and yield in peanut and could be recommended for peanut production in arid or semi-arid areas.